First-mover advantage is not something we normally talk about in the context of a virus. It may seem counter-intuitive, but China may be set to benefit in part because it was the first country to experience the coronavirus. The authoritarian nature of the Chinese government may be another factor.
Companies that sell into China and have suffered sharp falls in their share price, like Burberry (LSE:BRBY), may be worth investing in. Likewise, companies that rely on Chinese manufacturing may be set to see a share price recovery.
The economic impact of the coronavirus outbreak is already looking like it is going to be much more significant than experts were suggesting a few weeks ago, and I suspect that, as a result, shares have got much further to fall.
Of course, the first UK-listed companies affected by the coronavirus were those that relied heavily on China, either as a customer or seller. Then it was companies in the travel business. But now, very few companies are avoiding the sell-off. Economic shocks are like that – they eventually permeate every corner of the economy. Providers of essential goods and services are generally better off in these situations.
At some point we will see a recovery, and share prices may regain loss ground quite quickly. Spotting that moment of recovery is devilishly difficult, but I wonder whether we may be close to approaching that point with some companies that are trading in China.
A recovery that starts in China
According to the World Health Organisation (WHO), the spread of the virus in China is slowing. It’s slowing partly because China has had more time to come up with a way of dealing with the virus. Also, as the WHO stated: “China’s bold approach to contain the rapid spread of this new respiratory pathogen has changed the course of a rapidly escalating and deadly epidemic.”
Because of the power and influence held by local and national authorities in China, the government is now enforcing policies designed to limit the spread of the coronavirus that might be much harder to implement in more liberated countries.
For those reasons, recovery from any economic downturn caused by the coronavirus may begin in China, while most of the rest of the world is still dealing with an increase in cases.
The case for Burberry
Consider Burberry. Shares have fallen by a quarter since mid January. Burberry shares have enjoyed an outstanding performance this century — up 12-fold since the 2002 IPO, peaking in July last year.
Burberry was very much in vogue with investors before the coronavirus, and moved very close to its peak at the beginning of this year before wider stock market sell-offs. I think that with this company the main reason for falling share price is not so much fears about the coronavirus in general, but more specifically how the virus will affect China, which accounts for around 40% of Burberry sales.
That’s why I think Burberry shares could re-bound as the Chinese economy recovers from the virus.
Burberry is not the only UK-listed company that might see a share price recovery as a result. Retailers like Marks and Spencer and Next rely on Chinese manufacturing for their supply chain. As a result, the shares have been hit hard. I suspect that this pressure will ease quite quickly, too.
It’s official: global stock markets have been on a tear for more than a decade, making this the longest bull market in history.
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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.